UK Gas Markets: the Market Price of Risk and Applications to Multiple Interruptible Supply Contracts

Energy Economics, Volume 30, Issue 3, pages 829-846, May 2008

29 Pages Posted: 4 Oct 2006 Last revised: 11 Mar 2013

See all articles by Álvaro Cartea

Álvaro Cartea

University of Oxford; University of Oxford - Oxford-Man Institute of Quantitative Finance

Date Written: August 1, 2006

Abstract

We employ the Schwartz and Smith (2000) model to explore the dynamics of the UK gas markets. We discuss in detail the short-term and long-term market prices of risk borne by the market players and how deviations from expected cyclical storage affect the short-term market price of risk. Finally, we illustrate an application of the model by pricing interruptible supply contracts that are currently traded in the UK.

Keywords: Interruptible supply contracts, gas markets, commodities, market price ofshort-term and long-term risk, multi-exercise Bermudan options, convenience yield

JEL Classification: G12, G13

Suggested Citation

Cartea, Álvaro, UK Gas Markets: the Market Price of Risk and Applications to Multiple Interruptible Supply Contracts (August 1, 2006). Energy Economics, Volume 30, Issue 3, pages 829-846, May 2008, Available at SSRN: https://ssrn.com/abstract=934805 or http://dx.doi.org/10.2139/ssrn.934805

Álvaro Cartea (Contact Author)

University of Oxford ( email )

Mansfield Road
Oxford, Oxfordshire OX1 4AU
United Kingdom

University of Oxford - Oxford-Man Institute of Quantitative Finance ( email )

Eagle House
Walton Well Road
Oxford, Oxfordshire OX2 6ED
United Kingdom

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